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Brooks Wilson's Economics Blog: Romer and Samuelson on the Deficit

Monday, January 31, 2011

Romer and Samuelson on the Deficit

Greg Mankiw (Greg Mankiw’s Blog) linked to two articles concerning the State of the Union that support contentions that I have made in class: economists are at least in part guided by their economic science, that economic consensus often transcends politics, and that economics is more important than politics.  The issue is the deficit; both economists, Robert Samuelson from the political right and Christina Romer from the political right, agree that burgeoning deficits and mounting debt that threaten the financial stability of the United State government and the economy. 

At this point, I must be careful about any consensus that may exist between economists on the importance of the deficits and the debts they cause.  Without the advantage of surveys or polls of economists, I can only write that I believe that a consensus exists on the issue and that it is widely held.  At the least I can write that two economists with different political views agree on many of the problems caused by the deficits.  On the size and budgetary challenges of the deficit, Samuelson writes (“A Missed Opportunity On the Budget”),
Americans think deficits are someone else's problem that can be cured by taxing the rich (say liberals) or ending wasteful spending (conservatives). Obama indulged these fantasies.

If deficits stemmed mainly from the recession, this wouldn't matter. They would shrink as the economy recovered; tax collections would rise and spending (on unemployment insurance, food stamps) would fall. Unfortunately, this isn't the case. In fiscal 2010, the deficit - the gap between government spending and revenue - was $1.3 trillion. Of that, about $725 billion was a "structural" deficit, says Mark Zandi of Moody's Analytics. That is, it would exist even if the economy were at full employment (5.75 percent by Zandi's estimate).
Even this arithmetic may be misleading. Falling interest rates - reflecting the recession and Federal Reserve policy - have lowered the government's interest payments despite ballooning debt. In 2010, federal interest costs were $197 billion, down from $253 billion in 2008. But as the economy strengthens, interest rates will rise, offsetting some of the recovery's beneficial effect on the deficit. By 2020, annual interest payments could approach $800 billion, projects the Congressional Budget Office.
If anything, Romer views the deficits as presenting a bigger challenge (“What Obama Should Say About the Deficit”).
President Obama should embrace the reality that his re-election may depend on facing up to the budget problem.

The economic need is also pressing. The extreme deficits of the last few years are largely a consequence of the terrible state of the economy and the actions needed to stem the downturn. But even with a strong recovery, under current policy the deficit is projected to be more than 6 percent of gross domestic product in 2020. By 2035, if the twin tsunami of rising health care costs and the retirement of the baby boomers hits with full force, we will be looking at deficits of at least 15 percent of G.D.P.

Such deficits are not sustainable. At some point — likely well before 2035 — investors would revolt and the United States would be unable to borrow. We would become the Argentina of the 21st century.
The root cause of the growing deficits and debt is growing expenditures on Social Security, Medicare and Medicaid.  Samuelson writes,
Myth: The problem is the deficit. The real issue isn't the deficit. It's the exploding spending on the elderly - for Social Security, Medicare and Medicaid...

Myth: Eliminating wasteful or ineffective programs will close deficits. The Republican Study Committee - 176 House members - recently proposed $2.5 trillion of cuts over a decade in non-defense, non-elderly programs. This plan would kill dozens of specific programs…The Republicans' cuts are huge, about 35 percent. Even so, they would reduce projected deficits by at most a third. Over the next decade, those deficits could easily total $7 trillion to $10 trillion.

Myth: The elderly have "earned" their Social Security and Medicare by their lifelong payroll taxes, which were put aside for their retirement. Not so. Both programs are pay-as-you-go. Today's taxes pay today's benefits; little is "saved." Even if all were saved, most retirees receive benefits that far exceed their payroll taxes. Consider a man who turned 65 in 2010 and earned an average wage ($43,100). Over his expected lifetime, he will receive an inflation-adjusted $417,000 in Social Security and Medicare benefits, compared with taxes paid of $345,000, estimates an Urban Institute study.
Romer writes,
By 2035, if the twin tsunami of rising health care costs and the retirement of the baby boomers hits with full force, we will be looking at deficits of at least 15 percent of G.D.P…

Respected analysts across the ideological spectrum agree that rising health care spending is the biggest source of the frightening long-run deficit projections. That is why the president made cost control central to health reform legislation. He should vow not just to veto a repeal of the legislation, but to fight to strengthen its cost-containment mechanisms.

One important provision of the law was the creation of the Independent Payment Advisory Board, which must propose reforms if Medicare spending exceeds the target rate of growth. But the legislation exempted some providers and much government health spending from the board’s purview. The president should work to give the board a broader mandate for cost control.

The fiscal commission recommended that military spending — which has risen by more than 50 percent in real terms since 2001 — grow much more slowly in the future. It also proposed thoughtful ways to slow the growth of Social Security spending while protecting the disabled and the poor. And it recommended caps on nonmilitary, non-entitlement spending.
Both economists explicitly criticize the party with which they are commonly associated.  Samuelson writes,
Americans think deficits are someone else's problem that can be cured by taxing the rich (say liberals) or ending wasteful spending (conservatives).
Romer’s criticism is more subtle.  She wrote her article, (“What Obama Should Say About the Deficit,” before the State of the Union.  If President Obama had broadly addressed the issue of the deficits and the ensuing debt, it would not have been a criticism, but he did not. 

Romer and Samuelson will disagree on many issues.  Economics is not easily subject to controlled experimentation, models are complex and statistical inference testing is less conclusive than it might otherwise be.  With more room to wander from the scientific path, personal biases might be more important than in a science such as chemistry in which controlled experimentation is the rule, but these difficulties obfuscate an important point; their guiding light will be the economic science. 


  1. I do not have a degree in economics, but I think any one with common sense knows that huge deficits and interest payments can lead to financial disaster. When families are to far in debt it can lead to financial ruin and sometimes the destruction of the family itself. You can not spend more than you have without putting yourself on shaky financial ground. The entitlements and out of control spending that our government has put into place,defintley has put our nation and our economy in a very troubling place with an uncertain future. Elizabeth Rainwater

  2. Brandon Guthrie12/2/11 5:21 PM

    Of course our nation is leading into a very uncertain future with it's current spending and fastly growing debt. As the article states, at a certain point in the future, investors are going to refuse to let our nation borrow money. Unfortunately we cannot stop living so what we will do at this point in time? There needs to be serious looks at where and how we are spending our money. Something has got to be done before the situation becomes irreversible, if not already being there.